Where we are on trade now
- NAFTA talks may be nearing a peaceful resolution, but trade war is brewing between Washington and Beijing, as U.S. President Donald Trump announced plans on Thursday to impose tariffs on up to $60-billion worth of Chinese goods. The tariffs are meant to punish Chinese businesses for what Mr. Trump called “a tremendous intellectual-property theft situation” and to shrink the U.S. trade deficit with China.
- China is preparing for a “people’s war” with the United States over the tariffs, the Communist Party-run Global Times wrote in an editorial.
- Some Canadian companies could benefit from the U.S. tariffs or future Chinese retaliation against, but generally, Canada risks becoming collateral damage in a feud between its two biggest trade partners, The Globe and Mail’s Barrie McKenna explains.
- The U.S. will also exempt more nations from tariffs on steel and aluminum, including the European Union, Australia, Argentina, Brazil and South Korea, U.S. Trade Representative Robert Lighthizer said Thursday. Canada and Mexico had already been exempted, though U.S. President Donald Trump has tied the exemptions to a renegotiated NAFTA.
- NAFTA negotiators are "finally starting to converge" on auto-manufacturing issues that have stymied the talks for months, Mr. Lighthizer told a congressional committee Wednesday.
- A day earlier, The Globe revealed that the United States had dropped their demand that vehicles made in the NAFTA zone have at least 50 per cent U.S. content. The issue of "rules of origin" in manufacturing has been one of the major unresolved questions of the talks.
- Other tough U.S. demands remain on intellectual property and the trade deal's mechanisms for settling disputes. The U.S. is also trying to dissuade Canada and Mexico from introducing mandatory warning labels for foods high in sugar, sodium and saturated fat, The Globe has learned.
- The next round of talks on the North American free-trade agreement will be held in Washington in April.
What is NAFTA?
The 1994 agreement – an expanded version of a Canada-U.S. free-trade deal from 1988 – created what was then the biggest free-trade area in the world. It removed barriers to the flow of goods and labour between Canada, the United States and Mexico, under the oversight of an independent dispute-settlement process.
Canada – the world’s largest purchaser of U.S. goods – saw its exports to U.S. markets soar. The Americans are less dependent on NAFTA than Canada is, The Globe’s Steven Chase explains: Trevor Tombe, a University of Calgary economist, calculates that there are only two American states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output.
What has NAFTA done for us? Four views from three countries
Why change NAFTA?
The politics of free trade have undergone a remarkable U-turn since NAFTA, and the FTA before it, came into being.
In 1988, Canada had a Progressive Conservative prime minister, Brian Mulroney, who fought an election over the Canada-U.S. trade deal with the Liberals opposing it. He also had pro-free-trade Republican allies in the White House, with Ronald Reagan and later George H.W. Bush, backing him up.
Contrast that with 2016, when protectionism turned into a defining theme of the U.S. election. Both presidential candidates opposed the Trans-Pacific Partnership, a trade deal even bigger than NAFTA, but the Republican Mr. Trump also singled out NAFTA and promised to erect a wall along the U.S.-Mexico border. In his inauguration speech, Mr. Trump promised an “America first” attitude to trade,immigration and foreign affairs.
What does Trump want a new NAFTA to look like?
In its initial months, Mr. Trump’s inner circle strongly disagreed about what demands to make in NAFTA renegotiations. There was a moderate camp, including Treasury Secretary Steve Mnuchin and Mr. Trump’s son-in-law Jared Kushner, that wanted to enhance NAFTA and make cross-border business easier for corporations, and a protectionist camp, including former chief strategist Steven Bannon. The protectionist camp has been more dominant in recent months, especially since the March departure of economic adviser Gary Cohn.
- Reducing the U.S. trade deficit within NAFTA, which could mean increasing U.S. exports or reducing Canadian and Mexican imports.
- Scrapping NAFTA’s dispute-resolution panels, which have sometimes ruled in Canada’s favour on softwood lumber and other trade issues.
- Using “Buy American” provisions to bar Canadian or Mexican firms from seeking U.S. government contracts.
- Making Canadian and Mexican intellectual-property rules more “similar to that found in U.S. law.”
The Trump administration’s most contentious NAFTA demands began to take shape at the fourth round of talks in Arlington, Va. Demands include:
- Dairy: The U.S. wants an end to Canada’s supply-management regime for dairy and poultryproducts.
- Sunset clause: The U.S. wants the new NAFTA to expire in five years unless the member countries agree to renew it.
For months, the stickiest U.S. proposal was to require 50 per cent U.S. content in vehicles made in the NAFTA zone. But the administration relented on that demand in March, sources knowledgeable about the talks told The Globe.
The metal menace
The Trump administration has tried to gain leverage in the NAFTA talks with heavy tariffs on steel and aluminum. On March 8, Mr. Trump introduced tariffs of 25 per cent and 10 per cent, respectively, on the two metals, citing the need to protect domestic supply of the metals for U.S. military needs. For now, Canada and Mexico are exempted from the tariffs, but Mr. Trump explicitly linked that exemption to NAFTA: “If we’re making a deal on NAFTA, this will figure into the deal and we won’t have the tariffs on Canada or on Mexico. … I have a feeling we’re going to make a deal on NAFTA.”
The tariffs‘ effect on cheap Chinese metal imports could benefit Canada in the short term, Globe steel reporter Greg Keenan explains, but it could also have unpredictable effects on U.S. manufacturing and global tariffs on other products as the result of a trade war.
Canada’s contentious trade issues
Dairy supply management
Canada’s dairy, egg and poultry industries are governed by a supply-management system that dates back to the 1970s. It has three parts, The Globe’s Barrie McKenna explains: Fixed prices, production quotas and tariffs to protect Canadian producers from foreign competition. The dairy tariffs – which run up to 270 per cent, and which Canada tightened in 2016 to include unfiltered milk products used to make cheese and yogurt – have been a thorn in the side of other dairy-producing nations like the United States, Australia and New Zealand.
Mr. Trump’s interest in the dairy file began with events in Wisconsin, a major dairy-producing state, The Globe’s Joanna Slater explains. Local processor Grasslands Dairy Products Inc. wrote a letter to Wisconsin farmers recently saying it would stop buying the farmers’milk because of new Canadian classification rules for a product used in cheese making, which would give companies an incentive to buy domestically instead of from the United States. A letter-writing campaign to Mr. Trump – who narrowly won the state in the 2016 election – and congressional efforts by Wisconsinite House Speaker Paul Ryan made the dispute into a national issue, and at an April 18 event in Kenosha, Wisc., the President vowed to challenge Ottawa on its dairy policy:
In the months that followed, the Trudeau administration spoke in strong defence of Canada’s dairy and poultry sectors. Then, in the fourth round of NAFTA renegotiation talks, the Trump administration put its demands on the table: Phase out all tariffs associated with dairy and poultry supply management over 10 years. Canadian negotiators flatly rejected the demand, according to sources familiar with the talks.
Feuds over softwood lumber have been a recurring part of Canada-U.S. relations since the 1980s. Their root cause is U.S. industry’s contention that Canada unfairly subsidizes its lumber by providing cheap access to public land. It’s led to a cycle of American punitive action, followed by trade cases mostly won by Canada, and then a compromise settlement.
The fifth and most recent lumber war was set off on April 24, when U.S.Commerce Secretary Wilbur Ross said his agency would impose new anti-subsidy duties on Canadian softwood. The initial duties added up to about 20 per cent,but a second wave of anti-dumping duties in late June brought that total to about 27 per cent. The U.S. International Trade Commission upheld the duties in a unanimous final ruling on Dec. 7, arguing that Canadian shipments of softwood lumber were hurting American producers.
The Trudeau cabinet discussed an aid package for the softwood industry in May, but waited for provincial input from a special working group before announcing $867-million in aid on June 1. Ottawa gave the industry loan guarantees, help finding new markets for its products, employment-insurance support for workers and money for new initiatives from Indigenous forestry producers.
Chapter 11 vs. Chapter 19
Two of NAFTA’s dispute-resolution mechanisms are being targeted for major changes. How is Chapter 11 different from Chapter 19? Here are the basics.
Chapter 11: Government vs. businesses
Imagine a scenario where Country A passes a law that a corporation based in Country B feels would hurt its business. If Country B Inc. sues Country A’s government, the case goes to arbitration by an ad-hoc panel of lawyers appointed by the NAFTA countries, in a process set out in NAFTA’s Chapter 11. The idea is that these panels would be more independent than if the case were settled by Country A’s courts. But critics say the lawyers appointed to these panels risk conflicts of interest because of their business activities back home.
Canada has faced more Chapter 11 lawsuits than any other country – about 40 so far – most of which challenge its environmental protections and natural-resource policies. A 2015 study by the Canadian Centre for Policy Alternatives found Canada was the target of more than 70 per cent of all NAFTA investor-state claims since 2005, and study author Scott Sinclair warned that the problem was getting worse:
Canada has now been sued more times through investor-state dispute settlement than any other developed country in the world.
One of Canada’s goals in the NAFTA renegotiations is to overhaul Chapter 11 so that, instead of ad hoc panels, there would be set rosters of judges appointed by the NAFTA countries.
Chapter 19: Government vs. government
Whereas Chapter 11 lays out how companies can sue governments, Chapter 19 is for trade feuds between governments. If Country A imposes trade duties on Country B that B’s government thinks are unfair, B can appeal to an independent panel rather than seeking redress in Country A’s courts, which could presumably be biased in Country A’s favour.
Canada likes this arrangement because it has used it to successfully challenge American duties on softwood lumber and other products. But the Trump administration thinks the independent panels are a violation of U.S. sovereignty, and it wants U.S. courts to handle trade disputes.
In July, a senior official told The Globe that scrapping the independent panels is a “red line” Canada will not cross, and the Trudeau government would walk away from NAFTA talks if the U.S. won’t budge. Mr. Trudeau wouldn’t confirm the part about potentially walking away, but said he considers the panels “essential” to a new deal.
What about Mexico?
Building barriers (both physical and economic) with Mexico has been Mr.Trump’s stated goal since he began running for president; in the 2015 speech announcing his campaign (the one where he said “rapists” and criminals were coming across the U.S.-Mexico border), he said Mexicans were“laughing at us” and “killing us economically.” Now that Mr. Trump is president,Mexican President Enrique Pena Nieto is in a tight spot. He is facing domestic pressure to stand up to Washington about the wall that Mr. Trump wants Mexico to pay for, which Mexico refuses to do. But Mr. Pena Nieto also has to avoid alienating a major trading partner and being shut out of the new North American trade regime.
Mexican politics has played a major role in the timetable of NAFTA talks, because voters will choose Mr. Pena Nieto’s successor in a July 1 presidential election. Negotiators have faced tough decisions about whether to wrap up talks with the current administration or wait to see how things proceed with the new one.
Who’s deciding NAFTA’s future?
Here’s some more reading on key people to watch on the trade file.
The Canadian side
- Chrystia Freeland, Foreign Affairs Minister
- François-Philippe Champagne, International Trade Minister
- Steve Verheul, chief NAFTA negotiator
- David MacNaughton, Canadian ambassador to the U.S.
- Bipartisan advisory panel that includes former Conservative and NDP politicians, the head of the Assembly of First Nations, business leaders and labour organizers
The American side
- Robert Lighthizer, U.S. Trade Representative
- Wilbur Ross, Commerce Secretary
- Kelly Craft, newly confirmed as U.S. ambassador to Canada
The Mexican side
- Ildefonso Guajardo, Economy Minister
- Luis Videgaray, Foreign Minister
- Kenneth Smith Ramos, chief NAFTA negotiator
How could this affect me?
Uncertainty over NAFTA’s future has already had far-reaching effects on the Canadian economy, from the dollar to the energy sector – and, ultimately, to your personal finances. Here’s some more reading on what might be coming.
Economy and personal finance
Oil and gas
Manufacturing and technology
What about the rest of the world?
A new North American trade regime would be only part of larger changes in America’s, and Canada’s, role in the world – and with NAFTA’s future in question, Canada is looking for other sources of trade revenue.
- Asia-Pacific: Mr. Trump’s decision to withdraw the United States from the Trans-Pacific Partnership apparently killed the trade deal, but 11 countries gave it a new lease on life with China’s help. In January, 2018, after months of diplomatic back-and-forth about what a new TPP should look like, high-level talks in Tokyo produced a revised version that the 11 countries are hoping to officially approve by March.
- Europe: The European Union, Canada’s second-largest trading partner, finalized a trade deal with Canada even broader in scope than NAFTA: the Comprehensive Economic and Trade Agreement, which provisionally took effect on Sept. 21. On Sept. 18, British Prime Minister Theresa May said her administration and Mr. Trudeau’s had agreed that Canada and Britain should strike a new bilateral trade deal once Britain’s exit from the EU is complete,and CETA should be used as the template for it.
NAFTA talks are continuing to alternate between the United States, Mexico and Canada until a resolution is reached. The Trump administration originally wanted a deal by the end of 2017, but after the fourth round of talks they said they could wait until at least the end of March, 2018.
If Canada and Mexico don’t give in to the Trump administration’s demands, Mr. Trump may pull the plug on NAFTA to force their hand. Under Article 2205 of NAFTA, which allows any country to withdraw after giving six months’ notice; the process may not lead to a definite pull-out, but it gives the U.S. the option to leave.
With reports from Adrian Morrow, Bill Curry, Steven Chase, Robert Fife, Greg Keenan, Barrie McKenna, Evan Annett, Reuters and The Canadian Press
Images via Reuters, Associated Press, Canadian Press, iStockphoto